Hungary Rejects IMF Aid Conditions, Premier Orban Says

Hungary rejects conditions set by the International Monetary Fund for a loan, Prime Minister Viktor Orban said, prompting a plunge in the forint that has been buttressed by confidence an agreement would be reached.

The Washington-based lender asked Hungary to cut pensions and scrap a bank tax in exchange for the loan, which wouldn’t serve the nation’s interests, Orban said in a video message posted on his page at the social media website Facebook Inc. Orban said he would seek an “alternative negotiating proposal,” without elaborating. The IMF’s Budapest office declined to comment.

Hungary, whose sovereign-credit rating was cut to junk last year, has had its request for a loan of about 15 billion euros ($18.9 billion) delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the lender and the European Union. The Cabinet first requested aid last November. Yesterday, Orban said he expected an agreement with the IMF this autumn.

“This is looking ugly once again,” Luis Costa, a London-based strategist at Citigroup Inc., said in an e-mailed note. “I continue to see very little probability of a deal by October,” which the government had flagged.

Forint Faith

The currency dropped as much as 1.7 percent today, the most this year, before paring losses to trade at 287.97 by 4:11 p.m. in Budapest. Investor faith in an IMF agreement helped the forint surge 9.5 percent to the euro this year, after plunging 15 percent in the second half of 2011, the most in the world.

The gains in the forint showed Hungary needs an IMF credit line to maintain market confidence and the government “can’t avoid striking a deal,” Mihaly Varga, the government’s chief aid negotiator, said in Budapest yesterday.

Hungary can get by without additional foreign-currency funding until about March or April, said Gyula Toth, who helps manage 220 million euros at Ithuba Capital in Vienna.

Hungary resumed negotiations in July following an eight-month delay after the government compromised on a central bank law that critics including the European Central Bank said undermined monetary-policy independence.

Orban came into office in 2010 rejecting the extension of an IMF loan his predecessor had obtained. He appealed for aid in November of last year as the forint plunged, debt auctions failed and the country’s credit grade was cut to junk. On Dec. 22, he said Hungary can do without IMF aid, recommitting to negotiations two weeks later with the forint at a record low.

Orban’s Intentions

“I believe the government doesn’t really want an IMF deal, it only wants the markets to believe it’s seeking an agreement,” Daniel Bebesy, who helps manage $1 billion mostly in Hungarian government bonds at Budapest Fund Management, said in a phone interview today. “The past year has proved that markets can be deceived.”

Orban yesterday said said he expected an agreement with the IMF in the autumn and that the two sides were “close to the point where quick negotiations and the conclusion of quick negotiations are realistic.”

Today, speaking from a retreat of his ruling party in Sarvar, western Hungary, Orban said the IMF’s conditions, which haven’t been confirmed by the Washington-based lender, “are not in Hungary’s interest.”

“The meeting of the parliamentary group decided, and I myself share their opinion, that at this cost we don’t need it,” Orban said. “The parliamentary group has empowered us to put together an alternative negotiating proposal; this is what we’ll be working on in the coming days.”

Cabinet Measures

Questions e-mailed to Orban’s office seeking comment about the Cabinet’s plans weren’t immediately answered.

The Cabinet’s measures, including a special tax on lenders and the nationalization of private-pension funds, damaged investor confidence, contributed to the downgrade of the country’s credit rating, cut investments and helped push the economy into its second recession in four years.

Orban won the 2010 elections with an unprecedented two-thirds parliamentary majority on a pledge to end austerity. Even as his support has crumbled, according to all polls, his ruling party, Fidesz, has maintained a lead over the opposition more than halfway through the premier’s four-year term.

Fidesz had 17 percent support among eligible voters, compared with 14 percent for the Socialist Party and 8 percent for the radical nationalist Jobbik, state news service MTI reported Aug. 23, citing the polling company Ipsos. The survey of 1,500 adults was carried out between Aug. 12 and Aug. 19 and has a margin of error of 2.5 percentage points, MTI said.

‘Tolerance Level’

The government needs to gauge the “tolerance level of society” and hold consultations, Orban told reporters yesterday. The government will protect a 300 billion-forint ($1.3 billion) payroll tax-cut plan for 2013, aimed at jump-starting the economy, and won’t allow IMF conditions to threaten it, Orban said yesterday.

IMF demands to “radically” cut spending, which would mean a cut in wages and in public services, makes it a “tough dilemma” on how to strike a “good” agreement with the Washington-based lender, Antal Rogan, head of the ruling party’s parliamentary group and a member of the aid-negotiating team, told Magyar Nemzet in an interview published yesterday.

The Cabinet has said that the IMF objects to a financial-transaction tax on the central bank, which is one of the ways the government wants to finance the tax cuts, as well as its signature flat personal-income tax, which has cut revenue while failing to raise consumption.

Hungary needs to move away from “ad hoc” taxes to plug budget holes and should create a more “business friendly” environment to boost growth and make budget financing sustainable, the IMF said in a July 26 statement after holding what it called a week of “constructive” talks in Budapest.

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